Wednesday, April 29, 2015

From June 2014 to September 2014, gross job gains from opening and expanding private sector establishments were 7.2 million, a decrease of 259,000 jobs from the previous quarter, the U.S. Bureau of Labor Statistics reported today. Over this period, gross job losses from closing and contracting private sector establishments were 6.6 million, an increase of 115,000 jobs from the previous quarter.

I like this data series, with some caveats.* If you're not familiar with this series, note that gross flows are large relative to net flows. Roughly speaking, think of the Great Recession as involving about 8.5 million net job losses. Entering and expanding business establishments create at least half that many jobs even in terrible quarters, but a recession is characterized by even larger numbers of jobs being destroyed by shrinking or closing establishments. So gross flows are large relative to net flows.

I like to slice the data by extensive margin (opening or closing business establishments) and intensive margin (expanding or contracting existing establishments). Figure 1 reports the flows of employment associated with opening and closing establishments, and Figure 2 reports actual numbers of establishments that opened or closed (click for larger images).

Figure 1

Figure 2

The last time I blogged this series was the 1q2014 release, and that release didn't look great. But, confirming the usual cautions, that release did not seem to mark a new trend. Reallocation from the extensive margin is moving sideways, more or less, with year-over-year job gains from openings slightly down and losses from closings barely changed.

On the intensive margin, reallocation seems to be sticking to its gentle upward trend since the Great Recession. Both jobs created and jobs destroyed on the intensive margin are slightly up year over year.

So there isn't a lot going on along the establishment entry margin, with things pretty much moving sideways (which means fairly constant positive net job creation from entry). Reallocation associated with growth or contraction of existing establishments is steadily rising and may soon approach pre-Great Recession levels.

Now some usual thoughts: gross flows give us an idea of where jobs are being created and destroyed, which fleshes out the net job numbers that are more popular (and timely). More broadly, these data help dissuade us from always thinking in representative agent terms, which is what the net numbers incline people to do. It's tempting to think that net numbers tell us about the experience of most businesses, but in reality there is a lot of heterogeneity among firms, and reallocation proceeds at a high pace.

*The BED are quarterly data provided from the BLS based on state UI data. They are released with a lag of about 8 months. Like the BDS (the dataset I usually use here), the BED basically covers the universe of private nonfarm employers; unlike the BDS, the BED is available at higher frequency and is released more quickly. BED has other drawbacks compared to the BDS, such as a more limited ability to track firms.

The BLS effectively expanded the sample definition in the first quarter of 2013. The 2013q1 observation was the most obviously affected, as it reported all establishments that were added to the sample as establishment openings. For openings data, I have replaced the 2013q1 observation with the average of 2012q4 and 2013q2. I haven't dug into the data enough to know whether users can manually correct for this over the longer run.

It is also important to note that these numbers are seasonally adjusted, and any guess at net numbers based on the difference between two seasonally adjusted series is very, very rough. Non-SA numbers are available on the BLS website.

These numbers track business establishments, which are different from firms. Costco is a firm; your local Costco store is an establishment. Most firms consist of only one establishment. The BED is not ideal for tracking firms, as it has limited ability to correctly link establishments to the firm level.

Monday, April 20, 2015

The Economist has a really nice special report on family firms in the April 18th issue. I think this is a fascinating topic. I don't know the literature on this well, but I'd like to. Here's a literature survey from a recent working paper by Mullins and Schoar:

These studies document that family firms, on average, tend to be smaller than non-family firms, have lower performance, weaker governance structures, and are often concentrated in older, more regulated industries (e.g. Morck, Strangeland, and Yeung, 2000, and Claessens et al., 2000, 2002; Faccio and Lang, 2002; Anderson and Reeb, 2003; Bertrand and Schoar, 2006). Attention has also focused on the importance to firm outcomes of the CEO position (e.g. Bennedsen et al., 2010, 2012) and on the individual characteristics and styles of CEOs (e.g. Bertrand and Schoar, 2003; Malmendier and Tate, 2008; Schoar and Zuo, 2011).

Mueller and Philippon argue that "family firms are particularly effective at coping with difficult labor relations" because they can provide a more credible implicit contract; it would be interesting to study job flows specifically at family vs. non-family, controlling for size and age. In any case, I'm already obsessed with the fact that private firms are different from public firms; these data on family firms give me another thing to obsess over.

Recent literature also finds that transfer of control from founders to heirs can be hard on a firm, though transferring control to professional CEOs is less costly. The tricky problem, of course, is that selection effects might mean that founding CEOs are high ability, but there is less reason to assume that their heirs will be. From The Economist:

The biggest problem for family companies is the distinct possibility
that the children or grandchildren of business founders may not match
the founder for either brains or character. Warren Buffett, a veteran
investor, once compared family succession to “choosing the 2020 Olympic
team by picking the eldest sons of the gold-medal winners in the 2000
Olympics”. A family grandee says that the biggest barrier to keeping the
family show on the road is the “growing sloth of family members”. And
CEOs who bear the family name are far more difficult to sack than hired
hands, even if they turn out to be useless.

Why do I find this interesting? I think a lot about young firms and entrepreneurs generally, and how they matter for macroeconomics. One way to model questions in entrepreneurship is to follow Quadrini (2000) and separate the entrepreneurial sector from the "corporate" sector (where entrepreneurs are special in that they are linked to households); this is a nice modeling approach that I use in my research. But firms that start out as entrepreneurs or family affairs don't always stay that way forever, and there may be interesting things going on during the transition to more "mature" ways of doing business.

When thinking about the macroeconomic role of family firms it's important to get the weights right. From a macro perspective, simply looking at what percent of firms are family firms will give us an exaggerated sense of how much they matter (remember: most firms are small, but most people work at large firms). Says The Economist, "Family businesses make up more than 90% of the world’s companies. Many of them are small corner shops." I think you could replace "many" with "nearly all".

What I would really like to see are figures on the share of employment or revenue accounted for by family firms. The Economist doesn't give us that, but they do cite a BCG study finding that family firms account for 33 percent of U.S. firms with revenue over $1 billion. That's a lot--more than I would have expected! It's not just Cargill and Koch. Some of these firms are publicly traded; many of them are not--a reminder that a lot of activity does not show up in SEC filings.

Friday, April 17, 2015

The great Jim Tankersley has an article arguing that people should learn from A Song of Ice and Fire when thinking about the business cycle. It includes a quote from your humble savings scold. I want to expand on this a little.

!!!Some spoilers from the books may follow.!!!

Winter in
Westeros is a major recession; in particular, it is a real business
cycle (RBC) recession as it decimates agricultural productivity when
agriculture is the largest and most important industry. In some (or
most?) parts of the country, agricultural output falls to something
close to zero.

I always think of two major
mistakes the Westerosi are making with respect to their business cycle.
First, they are not saving enough. Second, they are not sufficiently
focused on technology.

The lack of evidence of saving is by far the most striking economic fact from ASOIF. An important point to
remember is that Westeros is in some ways a planned economy. Medieval
economics is far outside my wheelhouse; but what we can say is that a
large share of Westerosi resources are allocated by planners, with huge resources going toward
making war. These planners are typically really bad at taking
precautionary actions with respect to the coming winter. While various
indicators are suggesting that winter is imminent, we have the major
houses fighting over a crown. Not only does warmaking require
significant resources, but these people also seem to enjoy literally burning
fields while they're at it.

This is really puzzling
behavior from heads of houses who seem to care a lot about the future of
their brand. It seems like these people should be making huge efforts
to store food. The only reason to buy weapons is to protect your
storehouses. The only reason to build castles is to protect your storehouses. The only reason to mine gold is to buy food, buy food storage technology, or buy castles and weapons to protect your storehouses. And so on.

The
Starks, whom a lot of readers are inclined to like, really look bad in
this context. They have the most to lose from Winter--they are the first to enter and the last to exit winter, and their winter is likely the hardest. So why is Ned accepting a job in King's Landing when he
should be scrambling to prepare his jurisdiction for winter? Even worse, why does
Robb leave home to pursue a revenge war whose ostensible purpose is to
gain independence from a monarch who won't even matter when winter
comes? This is seriously reckless and irresponsible behavior.

As summer drags on and on, the Starks' time should be increasingly occupied by building huge greenhouses and building huge walls around them (Eric Crampton
has noted the greenhouse issue). There's really no excuse to focus on anything else, unless it's figuring out a diplomatic solution to the Wildling issue or, depending on your priors, fortifying the Wall against the Others. When Robert Baratheon shows up to hire Ned as Hand, Ned should be laughing him out of the North. "Me, come to King's Landing when my people will be the first to suffer in winter?! No way." And at the very least, he goes only on the condition that he's going to play Joseph of Egypt (or Andrés Velasco) and make the realm's famine preparation agenda his top priority. If he does that, he gives Catelyn and Robb strict instructions to carry on his work preparing the North. No silly excursions south when our people aren't ready.

So the Starks are idiots. Most of the other houses are too. Frankly, Tywin Lannister seems far too smart to waste time and resources on the war when he should be sending cartloads of gold to Highgarden in exchange for food (Matt Yglesias has touched on this before). And even if you do go to war, you don't go around gratuitously burning other peoples' fields. When winter comes, you want other people to have food too (so you can take it, or at least so they don't come to your door).

Maybe you end up saving too much. But, as I mentioned to Jim, that just means you'll have a chance to buy other house's assets at fire sale prices during winter. You may come out of winter with not only a full belly but also a new fleet of Iron Islanders' ships and a portfolio of Lannister gold mines.

We do see a few people taking things seriously. I don't know if we hear it explicitly, but it seems very likely that the Manderlys are on top of this. They seem to have a pretty long game generally. Wyman stays home and lets his sons fight the war, and we later learn that while home he's been focusing on a lot of long-game preparations. We also learn from the new Winds of Winter Sansa chapter that Littlefinger is getting things ready too (of course, as Master of Coin he really should have been focused on this at the realm level instead of selling royal debt the whole time).

The savings problem is precisely why the Lannister-Tyrell schism of A Feast for Crows and A Dance with Dragons is so important.

The
Tyrells came into the War of Five Kings very late so they still have
much of their military, agricultural, and economic might, and Cersei
just alienated them by having Margaery thrown in jail for adultery and
treason. This is happening at the same time that Winter Is Coming and
Aegon is taking castles in the Stormlands.

So Martin is likely to do something with this in coming books. I hope he takes it seriously. So far, I have a hard time making sense of the behavior of some of these houses.

UPDATE: Matthew Klein notes, "the food isn't grown in the North. If anything he should have focused on evacuating his subjects down to Dorne." Good point. Getting out of the North seems like a decent priority.

Tuesday, April 7, 2015

A few weeks ago there was a story that caught my interest, and I'm just now getting time to blog about it. The amazingly entertaining and informative Matt Levine pointed us to the NYT story:

Big money managers including Fidelity Investments, T. Rowe Price and BlackRock have all struck deals worth billions of dollars to acquire shares of these private companies that are then pooled into mutual funds that go into the 401(k)’s and individual retirement accounts of many Americans. With private tech companies growing faster than companies on the stock market, the money managers are aiming to get a piece of the action.

I think this is a cool story for two reasons. First, I've complained before about the inability of small investors to own young, non-public companies in a diversified way. Unless you're an accredited investor, you can't really get into venture capital or private equity (and even if you could, then you'd have to pay huge management fees). The only way for me to own non-public firms is to start one, and then I won't be diversified. But we know that private firms are different from public firms, so holding a diversified basket of public firms isn't really owning the whole economy (by the way, this is what annoys me about Buffett's "favorite stock market indicator"). For one thing, public firms are almost never young--that NYT comment about "private tech companies growing faster than companies on the stock market" has probably always been true and is probably true in other industries. Since young firms are the ones growing quickly, leaving them out of your portfolio seems nontrivial (with all the caveats about how the bulk of them actually have zero growth potential). Levine points out a complaint some people have about this:

One worry is of course that the big investment professionals might lose money on these investments, since the professionals are perhaps not experts at private company investment, and since the investments are made at pretty fancy valuations. My view is that you can lose money on public investments too, and there are lots of reason not to worry too much about your pension being invested in Uber.

We already know that professionals aren't great at picking public stocks--or, at least, their abilities aren't paying off for their investors. So I don't have a reason to think they're any worse at picking private ones. But I admit that this is way outside of my wheelhouse; I just think it's interesting that these vehicles for investing in private firms are being made available to regular people. That's sort of how I've always thought of Berkshire Hathaway, by the way.

The other reason I find this story interesting is that J.W. Mason has done this interesting empirical work (I discussed it here) documenting a declining propensity to reinvest earnings among public firms. Mason's empirical facts are interesting and persuasive; what I found less persuasive was the conclusion that he was drawing from them: that this trend hurts workers. I don't think we know that yet because that depends very much on where the money is actually going. I'm a macro person, and macro people are pretty obsessed with aggregation identities and general equilibrium stuff, and I don't see Mason's story happening in general equilibrium. He asked me on Twitter what he could do to make his story convincing, and I think the answer is that he could try to trace where that money is going. If it's going under rich peoples' mattresses, or if it's being set on fire or thrown in the ocean, then his story might have legs. Though I think the mattresses thing isn't out of the question, I'm still pretty skeptical of that theory. This story about earnings being invested in private firms seems like one piece to the puzzle.

Thursday, April 2, 2015

I recently read a paper that took an innovative approach to at least partially answer a question that is boggling the minds of many economists and other observers: why has the firm formation rate declined precipitously the last three decades? I think it’s one of the most important topics in the economics profession today, and warrants a great deal of continued research in the coming years.

Aside from liking what was new about this paper, something else stood out to me—something I’ve seen before. The paper itself isn’t important here, so I’m not going to reference it explicitly—I’m not one to needlessly criticize someone else’s hard work, particularly when doing so isn’t central to the argument I’m trying to make.

The paper analyzes the relationship between, let’s say variable X, and the “startup rate,” defined as the rate of new establishment formations, not firm formations. This was done, presumably, because data on the former are much easier to obtain. But firms and establishments are not the same, and evidence suggests it has increasingly become important to distinguish between the two.

In research published last year by Mark Schweitzer, Scott Shane, and myself, we showed that the source of new business establishments is increasingly coming from existing firms, or what we call “new outlets”:

Furthermore, because new outlets are generally larger than are new firms in terms of employment, economic activity at new business establishments (as measured by employment) occurs in no small part in new outlets:

Figure 2: Distribution of Employment at New Establishments (1978-2012)

This is something that is not occurring in isolation. The data show that this trend has happened in each broad industrial sector (9 SICs sectors) and across each state (data are not available at the metropolitan area level) during the last three and a half decades:

Figure 3: Share of New Establishments that are new Firms by Sector (1978-2012)

Among the sectors, the shift from new firms to new outlets as the source of new business establishments was greatest in finance, insurance, and real estate, the very broad transportation and utilities (which includes communications) sector, and in construction. Agriculture, retail trade, and mining saw the smallest changes over the 34-year period—but changed nonetheless.

For the states, the chart shows the 2012 new firm share of new establishments over that same share in 1978. Since the data are sorted by largest ratio at the top, states experiencing the smallest shifts from new firms to new outlets as the source of new business establishments are at the top, while those witnessing the most change are at the bottom.

In short, the importance of new outlets to the formation of new establishments has grown steadily and significantly during the last few decades, and this shift has occurred in each of the broad industry sectors and US states. As a result, studies that substitute new establishments for new firms—including when exploiting industrial and geographic differences—are increasingly using less precise estimates over time.